Economics

The euro-zone crisis

China to the rescue?

IT WAS only a matter of time before China was heralded as Europe's escape route from its debt crisis. News that Nicolas Sarkozy, the French president, called Hu Jintao, his opposite number in China, after the crisis summit on October 27th sparked speculation that China might put substantial amounts of money into the debt of troubled euro-zone borrowers. The chatter grew louder when Klaus Regling, the head of the European Financial Stability Facility (EFSF), the euro area's bail-out fund, visited Beijing a day later. And a poor post-summit Italian bond auction has made the need for a deus ex machina seem even greater.

China certainly has lots of money to invest. its foreign-exchange reserves are reckoned at $3.2 trillion. It trades more with the EU than any other partner. It has exposure to the euro already. How much is not known, but currency analysts suspect that about a quarter of those reserves are already euro-denominated, giving it an incentive to keep the currency strong. It also suits China to play the part of a constructive economic actor.

Then again, we have been here many times before during the euro-zone saga. You can trace the growing seriousness of the crisis by the list of countries that have had talks with the Chinese about investments: first Greece, then Portugal, Spain and now countries at the very core of the euro zone. The pattern to date has always been the same: lots of encouraging rhetoric, perhaps even a little cash, but not enough to meet initial expectations.

There is at least something different on offer now. In the past, investment in euro-zone debt has meant taking on as much risk, and sometimes more risk, than the Europeans themselves have been willing to absorb. No one could ever explain why the Chinese would want to do that. Now China will be able to choose to invest in euro-zone debt that is ensured by the EFSF, or to buy senior tranches of the special-purpose vehicles (SPVs) that the EFSF will capitalise. China would explicitly be taking less risk than the Europeans.

That helps, but probably not enough to deliver a different outcome. The Europeans are taking more risk but that does not mean that they are offering lots of protection to other buyers. And it will take time for these structures to be set up: China will want lots more detail, and to see how the Greek bond swap with private creditors goes, before it commits cash.

Grand political bargains between China and Europe—money in return for more representation at the IMF, or market-economy status—seem wildly improbable. These prizes will eventually come anyway; and weak though parts of Europe are, the EU cannot be seen to trade them too nakedly. Bargaining of this sort would also require both parties to change their positions markedly. China is keen not to be seen as a source of “dumb money”, but requiring big political concessions in return for cash is a pretty clear signal that this is not a commercially attractive investment. As for the euro zone, it can hardly claim that senior Spanish and Italian debt is now safe for institutional investors if it has to horse-trade too hard to get China on board.

That does not mean that Mr Regling's trip, which now takes him to Japan, is wasted. It is plausible that China will put some money into euro-zone debt alongside other non-European countries. How that money could be used depends a bit on whether it is channelled by the IMF or some other means. One option might be for other governments jointly to invest in a thick junior tranche of an SPV so that private investors would have an even greater cushion protecting them from any losses. A financial vehicle that saw the euro zone take most risk through equity, other governments a bit more through subordinated debt and private-sector investors the least through senior debt is still a long shot. But it is more realistic than expecting China to splash enough cash to save the euro.

China should be careful that Europe will not cheat again. Years ago, EU asks China to pump some money to join the Galileo, then kicks China out without any apparent reason but withholding the money. But thanks to the hard working of the Chinese people, now Beidou has put Galileo in shame and legitimately control the wavelength that European has been dreaming for.

So, big concession from shameless and incompetent European is necessary before China puts any dime, period.

The Europeans are brain-dead if they're asking the Chinese to buy European bonds. Such purchases would hurt, not help, European employment, by making the Euro stronger. If China truly wanted to help Europe it would take down some of its barriers to European goods and services. One such barrier is its currency manipulation, which it achieves by purchasing Euro (and dollar) bonds instead of goods and services from the rest of the world.

"(1) China shot down a satellite using a DF-21 missile/ Europe do not even have this technology"

Ballistic missiles were first developed in Germany, now your claiming the Europeans "do not even have this technology"?

"(2) China's new anti-ship ballistic missile can sink an aircraft carrier from 1200 miles away=== Europe dont even have this technology"

See above.

"(3) China have Nano-molsecular technological weapons which Europeans dont even know what it is"

Nano molecular weapons aren't viable yet, no-one has them you twit.

"(4) China have EMP Pulse weapons"

I think Russia was having a run on these in a recent arms sale. Common these days, where have you been?

"(5) also Laser ASAT"

Also the domain of Russia and the US, but OK, not Europe. At least as far as I'm aware.

"(6) Also Microwave weapons"

Like the EMP weapons, fairly common these days.

Your over developed sense of nationalism has you flexing Chinese military muscles here for no reason. It's gratuitous and it serves more to reveal current Chinese arrogance and belligerence than anything else.

China is a successful country. The Europeans should ask China to buy their bonds. The only thing is that it might not help out a whole lot. Also it is not really fair to China. They have done a good job with their money so they should put it in a more secure investment opportunity and not in European bonds. It is completely up to China but I dont think it is the best investment strategy for them right now.

With all the anti China aggression coming from the US...Romney, Santorum and Trump, and Congress it makes political sense for China to become economically more intertwined and more closely allied with its main trading partner the EU. Reducing exposure to US debt will be useful too.

Of course China will help Europe, but for a price: recognition of China as a 'market economy' and abolishing the export ban of armament to China.

The recognition of China as a 'market economy' will take away much of Europe's ability to restrict Chinese export to Europe. That may be a good thing, because Europe is prone to erect non-tariff trade barrier against cheap Chinese exports.

But exporting armament to China is definitely not good for world peace.

In order to save itself, Europe is likely going to make the bargain with the devil this time.

Of course China will help Europe, but for a price: recognition of China as a 'market economy' and abolishing the export ban of armament to China.

The recognition of China as a 'market economy' will take away much of Europe's ability to restrict Chinese export to Europe. That may be a good thing, because Europe is prone to erect non-tariff trade barrier against cheap Chinese exports.

But exporting armament to China is definitely not good for world peace.

In order to save itself, Europe is likely going to make the bargain with the devil this time.
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Don't confuse the whole of Europe for the few that are desperate to keep the EU together.

This ever-shrinking minority of UE proponets need to accept the Union is failing. Let the EU disolve and let each nation decide how they will either work together, turn independently to the Chinese for financial assistance or do whatever else they decide to do.

Merkel and Sarkozy are going to sell their own economies to the Chinese to save Greece, Italy and Spain? This makes my head spin.

I really don't think this is the smartest move on the European's part. This small boost from China will most likely not do much. It might help very slightly to alleviate the debt but then there is the new problem of making the Euro stronger. China also has minimal risk by agreeing to this while the EU will suffer even more with this agreement. Also for public image, it does not look good that some of the core euro-zone countries are asking China for help. Overall, I don't think that this will solve the EU debt problem and it will actually just generate more issues.